HELOC vs. personal loan: which is better?
A home equity line of credit (HELOC) is a type of revolving credit that works like a credit card. HELOC eligibility is based on how much equity a homeowner has in their home. To calculate the equity in your house, estimate your home’s market value and subtract your remaining mortgage balance. Lenders will decide on your loan amount based on the amount of equity you have in the home, and the more equity you have, the more you’ll likely be able to borrow.
Like a HELOC, a personal loan can be provided by a credit union, bank or online lender and can be used for a wide variety of personal expenses. Most personal loans are provided in a lump sum payment, and you'll repay the loan in monthly installments.
Deciding between a HELOC or personal loan depends on a variety of factors, including the amount of equity in your home and whether you are financially comfortable using your home as collateral to secure the loan. As such, choosing a HELOC vs. a personal loan depends on your financial situation and needs.
Read on to learn more about a HELOC vs. personal loan.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is a HELOC?
A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender which has a credit limit, a variable interest rate, and which is secured by the equity in your home. Most HELOCs have a 10-year “draw period” during which money can be borrowed, followed by a repayment period.
There are
HELOC pros and cons to consider. One of the advantages of a HELOC is that you can take out money as you need it, and you will only pay interest on the amount you use.
What is a personal loan?
Personal loans may be granted by credit unions, banks, and online lenders. If you are approved, you will receive a lump-sum payment that you will need to repay in monthly installments. The money can be used for a variety of purposes. Personal loans are typically used for personal expenditures like starting a business, paying medical bills, consolidating high-interest credit card debt, or other major expenses.
How do HELOCs and personal loans compare?
Eligibility requirements. Eligibility for a personal loan is based on your credit score, while eligibility for a HELOC is based on the amount of equity in your home.
Uses. The money you borrow from both types of loans can be used any way you choose.
Interest rates. HELOCs come with a variable interest rate that converts to a fixed rate (depending on the loan terms). Personal loans may have a fixed or variable rate. Always shop around with different lenders to compare rates before choosing a loan.
Collateral.
Personal loans can be
secured or
unsecured. A secured personal loan requires the borrower to pledge an asset such as the balance of a deposit account or a vehicle to “secure” the loan. An
unsecured personal loan is based on the applicant’s creditworthiness (not collateral or security).
Loan amount. Personal loans tend to go up to $100,000, while HELOCs go to higher amounts based on your home equity and home value, among other factors.
Loan term. Loan terms vary depending on the lender's policies. However, personal loans may be repaid in up to 10 years. HELOCs generally have a 10-year draw period and a 15- to 20-year repayment period.
Repayment options. Repayment of a personal loan will include principal and interest. Repayment of a HELOC may start as interest-only during the loan draw period and change to principal and interest during the loan repayment period.
Potential fees. When applying for a personal loan or HELOC, ask the banking representative about application fees and other types of fees. HELOCs tend to come with more fees because a home appraisal will be needed and most HELOCs have
closing fees. Most HELOCs also have a
prepayment penalty fee.
Tax advantages. The interest paid on a personal loan is not tax deductible. Interest paid on a HELOC may be tax deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
When getting a HELOC is better
There are times when getting a HELOC may be better than getting a personal loan, however, you may want to speak with your tax accountant or financial advisor prior to moving forward, to make sure you've selected the best option for your unique financial situation.
- Lower interest rate. When it comes to HELOC vs. personal loan rates, HELOC rates may be lower than some personal loan interest rates, depending on whether the personal loan is secured or unsecured.
- Larger borrowing limits. HELOCs typically have a higher borrowing limit than personal loans, which may provide up to $100,000.
- Tax benefits. According to the IRS, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or substantially improve the residence, interest you pay on the borrowed funds is classified as home acquisition debt and may be deductible.
When getting a personal loan is better
As with all financial products careful consideration is needed to determine which is best for your needs. Here are some examples of when getting a personal loan might be better than getting a HELOC.
- You don't have enough equity. HELOC eligibility requirements include your credit score but mainly is determined by how much equity you have in your home. Most credit unions and banks will generally lend between 70% to 85% LTV (loan-to-value) based on your home equity.
- You need funds fast. HELOC funds can disbursed in approximately two to six weeks, depending on how quickly you can get the necessary documents to the lender and the lender's processing timeframe. However, getting approved for a personal loan generally takes from one day to one week.
- You don't need a large loan. Personal loan amounts are typically up to $100,000, which is enough for most people's needs.
- Your credit score needs work. Most lenders have a HELOC minimum credit score requirement of 660. You may qualify for a personal loan with a credit score as low as 580. You can build and improve your credit score with a credit builder loan.
- You don't want to use your home as collateral. An unsecured personal loan doesn't require collateral, and therefore doesn't directly put your home at risk of foreclosure if you are late with payments or cannot repay the loan. HELOCs use your home as collateral, which means if you default on the loan the lender can take possession of the house through a foreclosure.
Alternatives to HELOCs and personal loans
Credit cards. If you need extra money in the short term to make home repairs, pay for college tuition, business expenses, or medical bills, credit cards are easy to get. Many credit cards offer a promotional 0% APR (annual percentage rate) for a fixed period, usually 12 months. After the promotional rate expires, there will be a new higher rate applied to the outstanding balance, so be sure you know what the post-promotional rate will be.
Home equity loans. A
home equity loan lets you borrow money from a lender based on the equity of your home and uses your home as collateral to secure the loan. Home equity loans are given in a lump sum of money, and you'll start paying interest on the entire loan amount whether you draw from it or not. A HELOC comes with a variable interest rate and grants homeowners access to a credit line that is available for a period of time called the draw period. Interest is only charged on the amount of money that’s withdrawn from the credit line.
Cash-out refinance. A cash-out refinance involves getting a new mortgage at a new interest rate and borrowing more than what you owe on your current mortgage. The extra cash is given to you at closing. You pay interest on the full mortgage amount, whether you use the cash or simply keep it in your bank account. A HELOC is a second mortgage taken out separately from your first mortgage, and you only pay interest on the amount of the credit line you use, not the full amount you're approved for.
Personal line of credit. A
personal line of credit is a loan that works like a credit card. As you repay the loan your available credit is replenished. This type of loan is unsecured, meaning that you do not have to put up collateral such as your car or house. While a HELOC is a line of credit it is a secured loan that uses the home to secure the loan.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!